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MTC Leaders Propose Beefing Up Role of Sovereignty Member States

Posted on Sep. 3, 2019

The Multistate Tax Commission’s voting structure — currently designed for compact members — could change under a proposal that would give sovereignty member states a say in the organization’s top-level decisions and direction.

MTC Deputy Executive Director Marshall Stranburg came up with a method for providing sovereignty member states with what he calls a meaningful vote in the organization while staying within the parameters of the Multistate Tax Compact. He and Executive Director Greg Matson over the past year developed the proposal, which would take the form of amendments to the MTC’s bylaws.

The upshot is that a double majority — that is, a two-tiered test — would be required for passage of any regular, uniformity, or financial item before the Executive Committee or before the organization as a whole.

Matson and Stranburg provided an overview of the proposal to the Strategic Planning Committee at the MTC’s annual meeting in Boise, Idaho. Matson also circulated a memo in which he provided several examples of voting under the proposed double majority requirement, including scenarios involving hypothetical increases in the number of states that are sovereignty members compared with those that are compact members. 

Here’s a simplified take on how it would work: As it does today, the Executive Committee would hold a vote on whether to approve an item, but unlike today, both compact and sovereignty member states would participate in that single vote.

The first consideration under the two-tiered test would mirror the MTC's current voting requirements. That is, a simple majority of compact states would be needed to approve regular items, while passage of uniformity proposals would require a 60 percent majority of compact states. Matson and Stranburg emphasized that no proposal failing to meet the required majority of compact states would pass. 

But if a proposal cleared that first hurdle, then the second test for passage would kick in: A required majority of compact and sovereignty states combined must vote in its favor. If they don't, then the proposal would fail — even though the required majority of compact states had voted for its passage.

“That provides sovereignty states with a vote,” Matson said. “I think it’s particularly ingenious.”

When pressed by Utah State Tax Commission Chair John Valentine, Stranburg declined to categorize the proposed role of the sovereignty states as a veto authority.

“We feel we are still in compliance with the terms of the compact, saying that the majority of our compact members have to be in favor of the proposal or approval of the budget,” Stranburg said. 

At the same time, Matson and Stranburg said they believe it’s important to find a way to formalize the input of sovereignty member states and to encourage additional states to participate and consider becoming sovereignty members. Given their financial contribution to the organization, sovereignty members ought to at least have a vote, Matson and Stranburg said.

Surprising Stats

Of the top five states contributing to the MTC’s general operational budget, four are sovereignty members, according to Matson.

First, a little background: The MTC currently has 16 compact members, which are jurisdictions that have adopted the compact. They are Alabama, Alaska, Arkansas, Colorado, the District of Columbia, Hawaii, Idaho, Kansas, Missouri, Montana, New Mexico, North Dakota, Oregon, Texas, Utah, and Washington.

The MTC created the membership category of sovereignty states 25 years ago. Unlike compact members, sovereignty members have not adopted the compact — a state’s governor or revenue agency can simply commit to this level of membership. The MTC currently has eight sovereignty members, which is the most it has had at any one time, Matson said; those states are Georgia, Kentucky, Louisiana, Michigan, Minnesota, New Jersey, Rhode Island, and West Virginia.

Sovereignty member states support the purposes of the compact and, importantly, they pay the MTC’s general membership assessment, just like compact members do.

“Sovereignty member states are treated just as compact member states in every way possible, subject only to the limitations of the Compact,” Matson said in his memo. “Thus, they shoulder the funding load for the general operations of the MTC with the compact member state siblings, but they cannot vote at Commission meetings and the head of their state tax agency cannot hold office or be a member of the Executive Committee.”

The MTC’s general membership assessment covers the costs of the MTC’s uniformity, research, legal and administrative support, legislative efforts, litigation and amicus curiae support, and other general activities, such as the annual conference. When the MTC sets the costs for its general operations for the fiscal year, the total amount is distributed across compact and sovereignty member states; that amount becomes a state's general membership assessment. The figure is calculated using a formula under which 10 percent of the MTC's general operational budget is divided equally among the compact and sovereignty states, while 90 percent of a state's membership assessment is based on the state’s relative shares of compact-relevant state and local tax revenues.

That is how it is possible for four of the top five states contributing to the MTC’s operational budget to be sovereignty rather than compact members. Last fiscal year, Texas — a compact member state — paid the most in its general MTC membership assessment ($211,109), followed by sovereignty member states New Jersey ($131,638), Georgia ($104,940), Michigan ($104,037), and Minnesota ($92,875). In fact, those four sovereignty member states alone financed about 32 percent of the MTC’s operational budget in fiscal 2019. 

Because sovereignty member states, like compact members, do not pay the 20 percent surcharge for participating in the MTC’s joint audit and national nexus programs, “smaller states often save money by becoming sovereignty members,” Matson said, noting that Rhode Island, a recent addition to the MTC’s audit program, is also its newest sovereignty member.

“But those same apportionment mechanics have driven away sovereignty member states and kept states from considering sovereignty membership because of a general membership assessment that is too daunting, given the state would not have a vote or be able to participate in the leadership of the Commission,” Matson said in his memo.

Big States in Play?

According to Matson, about a decade ago, Stranburg — then Florida’s revenue director — called then-MTC Executive Director Joe Huddleston and said the state would like to support the MTC’s general operations. But Stranburg said Florida’s general membership assessment would have been too big a hit for the state to become a sovereignty member state, especially given that it would have no say in the organization’s top-level decisions.

“We might have some very large states that are looking to up their game with the commission,” Matson said. He added that becoming a sovereignty member state, which does not require a state to adopt the compact, might be “an easier route for them to go.”

Matson did not name any states considering sovereignty membership. But there are several possibilities, including California, Florida, Illinois, Massachusetts, and Pennsylvania — revenue officials from all of those states attend various MTC meetings. In theory, Ohio and New York should be in the mix, but probably are not.

California, which withdrew from the compact in 2012 during the litigation in Gillette Co. v. California Franchise Tax Board, has slowly started participating again in some MTC activities. For example, Laurie McElhatton, a multistate corporate tax counsel for the Franchise Tax Board, is heading the MTC work group on Public Law 86-272. Michigan and Minnesota, which also both withdrew from the compact during litigation over the elective apportionment method, are currently MTC sovereignty members. 

Stranburg said that giving sovereignty members a vote would not only engage the current sovereignty members but encourage other states to become sovereignty members when they know their financial commitment will lead to a say in how the MTC acts on uniformity proposals.

“They can justify it by saying, ‘Yes, we do [have the] ability to impact decisions that are made at the commission level,’” Stranburg said.

Matson added that the approach would provide “a way to engage a lot more states in considering, reviewing, and approving uniformity recommendations to the states.” Instead of just the 16 current compact members, almost half the states would vote on MTC adoption of a uniformity proposal if the changes were made today, he said.

More Details

Sovereignty member states already are eligible to participate as voting members on any committee reporting to the Executive Committee or to the MTC, whose work primarily involves activities funded by the membership assessment. Likewise, officials from sovereignty states currently can serve in leadership positions on any committee below the Executive Committee level.

Under the proposal circulated by Matson and Stranburg, the MTC’s officers would continue to be elected from among only the compact member states. However, both compact and sovereignty member states would have full voting power at any Executive Committee meeting, including any uniformity recommendation.

Also, any uniformity recommendation approved by the Executive Committee for possible advancement in the MTC’s adoption process would need to pass a survey of affected compact and sovereignty member states before it could be put up for a final vote for MTC adoption. The relevant required majority of compact and sovereignty member states also would be needed for all votes at MTC annual meetings.

Notably, Matson and Stranburg would drop the current population requirement for votes on regular and uniformity items — in addition to the required simple or 60 percent majority for a given item to pass, the MTC’s bylaws also currently require the vote for approval to represent a majority of the total population of all compact member states.

Matson and Stranburg would retain that population requirement in regard to votes on financial matters — primarily the MTC’s annual budget — but they are proposing changing the relevant population apportionment rule to address scenarios in which a state has more than one tax agency that administers taxes covered by the Multistate Tax Compact.

“There’s one state that this applies to at this time,” Matson said. “California.”

Under the proposed bylaw amendment for votes on financial matters, if the California FTB wanted to participate with the MTC as a sovereignty member state, but the state's Department of Tax and Fee Administration did not, then the MTC would not look to California’s entire population, Matson said. Instead, the population weighting for California in votes on MTC financial matters would be related to the compact-specific taxes administered by the FTB, he said.

“In a population requirement, we don’t want them bringing in the entire state’s population and having an outsized influence on the vote” on financial matters, Matson said.

Next Steps

Matson said it took a while for the proposed approach to grow on him.

“But as I got settled into it, I realized, ‘If we’re going to give more states meaningful input into the activities — and particularly in uniformity recommendations — then we have to give them the ability to dissent, to vote no,’” Matson said. “And we want those votes to be meaningful.”

Matson said he’d like to see the Strategic Planning Committee hold a teleconference this fall devoted to the proposed bylaw changes. The Strategic Planning Committee then would likely further discuss the proposal at its November committee meeting in San Antonio, Texas.

“This is not the only idea we kicked around,” Stranburg said, adding that there are other approaches he and Matson considered and that they welcome suggestions for other ways to accomplish what they’re trying to do.

Should the Strategic Planning Committee develop a final proposal and recommend it to the Executive Committee, the Executive Committee would vote on whether to recommend that the bylaw amendments be adopted by the MTC. Should that happen, the MTC would then provide compact member states with 60 days’ notice of a final vote.

Ultimately, the compact member states alone would decide, in a final vote, whether the MTC adopts the proposed bylaw changes.

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